San Diego's Schooler brothers

This excerpt from the Securities & Exchange Commission’s complaint against Lou Schooler lists one of the fraudulent practices in which the Schooler brothers engaged.

San Diegans wanting to entrust their money to glib securities peddlers can go to school on the Schoolers — Lou and John Schooler. Lou owns Western Financial Planning Corporation, which has been charged with running a $50 million real estate fraud. Lou indirectly owns half of a brokerage house called WFP Securities, run by his brother John, who has a smaller ownership position in the web of Schooler-dominated firms. The WFP brokerage house put elderly, financially squeezed investors in dubious investment schemes, some later deemed fraudulent by the government. In an April column last year, I showed how the brokerage house was drowning in arbitration claims from indignant investors. It closed its doors two months later.

The brokerage house now exists mainly to settle the arbitrations — generally for low amounts because “you can’t get blood from a stone,” says Miami attorney Jeffrey Kaplan, who handled several arbitrations. The brokerage house “didn’t have adequate insurance and has no money. A lot of the products sold by WFP Securities were risky, illiquid, high-commission products. The driving force was brokers’ desire to get high commissions.”

Lou Schooler’s company stands charged with making fraudulent land deals.

WFP brokers also sold Western Financial real estate deals. The Securities and Exchange Commission in September charged that since 2007, Lou Schooler and Western Financial have been defrauding investors in land partnerships. “Schooler buys raw, undeveloped land in the southwest United States, then sells the land at grossly inflated prices to general partnerships comprised of numerous unsophisticated investors,” says the securities agency. But Western Financial doesn’t disclose the “enormous markup” to investors, according to the government.

This excerpt from the Securities & Exchange Commission’s complaint against Lou Schooler lists one of the fraudulent practices in which the Schooler brothers engaged.

For example, Western Financial is now offering Nevada land that it purchased for $1.85 million two years ago. Western has sold chunks of that land to investors for a total of $9.3 million — about a 500 percent markup, says the agency. In addition, Western woos investors by quoting the values of so-called comparable pieces of land (called “comps”) that aren’t comparable at all, says the agency.

Last year, after some not-so-unsophisticated investors figured out the alleged scam, Schooler returned their money in exchange for a promise to keep quiet; the government agency calls it “hush money.”

A federal judge temporarily froze Western Financial’s assets, named a receiver, and banned any document destruction. On October 5, the judge ruled that there is a prima facie case that the defendants violated securities laws. He said the securities agency has offered no evidence that defendants are hiding or sheltering money, he was not impressed with the “hush money” assertion, and he thought the argument for a further asset freeze was tenuous. Nonetheless, Schooler agreed to a continuation of the freeze. No more land deals are being sold now.

San Diego attorney Ron Marron had three clients who lost money in WFP Securities; two also lost in Western Financial. After getting settlements last year, “they are satisfied,” says Marron. He says that the brokerage house and Western Financial Planning are essentially the same entity, controlled by Lou and John Schooler. “They are alter egos aiding and abetting each other.”

In August of 2011, one San Diegan, having read my piece on WFP, called me about Western Financial. He figured that he and fellow investors had paid far too much for the land in one of Western Financial’s deals. “It will take forever for us to get back the money we paid,” he said at the time. He won’t discuss the matter now.

John Schooler is back in the securities business with a Scottsdale firm. His Financial Industry Regulatory Authority records show 14 complaints and arbitrations. Most of the settlements are wee: for example, alleged damages of $250,000 and a settlement of $15,000, and alleged damages of $335,000 and a settlement of $42,500. His Los Angeles attorney Brandon Reif concedes that the settlement amounts are low.

“Just because investments decline in value or there are allegations of wrongdoing at the sponsor level, it does not translate into misconduct at the securities firm,” Reif claims. Those who got skinned in those brokerage-house deals — which included Ponzi schemes — argue vehemently that the brokerage house did not do its due diligence and sold risky deals that were hardly appropriate for those wanting conservative income.

Reif argues that there are “significant risks inherent in investing in private or publicly non-traded investments…new business ventures do not have audited financials.” Ergo, due diligence is difficult. He says the investors knew the risks.

Hmm. Take the case of Orange County’s Jaimie Davis. She lost $2.3 million in speculative WFP securities, lost her arbitration before the Financial Industry Regulatory Authority, and had to forfeit $135,000 to WFP and related parties for costs. She had gone into arbitration against the issuers of the bum securities before a competing dispute-resolution panel, Judicial Arbitration and Mediation Services. That’s a no-no with the regulatory authority, and its arbitration panel dinged her. Davis’s lawyer, Sacramento’s Melinda Jane Steuer, says Davis wouldn’t have taken settlements from two sides in the same dispute.

Davis is appealing on the grounds that the arbitration panel excluded her sole expert from testifying. Also, WFP intimidated a witness from testifying, according to sworn statements by both the frightened potential witness and Davis’s then attorney. Reif says those declarations were false.

One ruling in Davis’s case was poignant. Her broker told her an investment was safe. But she admitted she had read a document that told of risk factors. The panel cited a precedent from another case: “If a literate, competent adult is given a document that in readable and comprehensive prose says X (X might be, ‘this is a risky investment’) and the person who hands it to him tells him, orally, not-X (‘this is a safe investment’), our literate competent adult cannot maintain an action of fraud.”

In other words, if a smarmy broker tells you an untruth, but the fine print says otherwise, the fine print prevails.

Since WFP and Western Financial are joined at the hip, the big question is why hasn’t the securities commission added the brokerage house to the case? Neither the commission nor the receiver responded to that question. ■

Comments

“If a literate, competent adult is given a document that in readable and comprehensive prose says X (X might be, ‘this is a risky investment’) and the person who hands it to him tells him, orally, not-X (‘this is a safe investment’), our literate competent adult cannot maintain an action of fraud.”

This quote troubles me. This seems to imply to me that it's OK to lie to someone as long as you tell them the truth in the fine print somewhere.

I disagree with this position from the panel - I do not think it's reasonable. Nobody has time to read all the fine print in all the complex documents we are given - let alone to fully understand all their implications. Fine print should only clarify details and what happens in unusual situations. Fine print should NEVER completely contradict anything that's said orally or in large print. If it does then, in my view, fraud HAS beeen committed.

ImJustABill: You are absolutely correct. Nobody has the time to read and understand all the fine print documents you must agree to in an investment, purchase of a household item, signing up for an online service, whatever. But this argument is used in investment arbitrations all the time: you not only signed that you would only go to arbitration, not court, but you also signed, probably unknowingly, that you were interested in high returns that might be risky. The broker may be a liar but you have little defense. This goes on in the whole concept of "full disclosure," the altar of which the SEC genuflects upon. If the fact that you are being screwed is buried in fine print in legal Latin in the prospectus, you may have no recourse. Best, Don Bauder

I don't know about the time thing, but I read the fine print of everything I sign...and I ask questions. I got burned on a deal once because I didn't read the fine print. Fool me once, shame on you, fool me twice shame on me

Well, that is certainly good advice in theory. However, I find your claim difficult to believe unless you really have extreme amounts of free time. You really read and understand EVERYTHING you read and sign? Thanks to sleazy lawyers and stupid or corrupt judges ,we are all inundated with pages of fine print in all aspects of life. Wading between the important fine-print vs. the non-important "boiler-plate" fine-print is not easy except for an extremely skilled expert.

ImJustABill: Jeff is a savvy investor. Wall Street wants to attract small, unsophisticated investors, yet has an arbitration mechanism that favors the industry and routinely screws the small investors. This is one of many reasons why actual INVESTORS -- as opposed to high-frequency traders, bank trading desks et al -- feel lost in a sea of short swing gamblers that have rigged the system as well as the trading. Best, Don Bauder

The brokerage house “didn't have adequate insurance and has no money. A lot of the products sold by WFP Securities were risky, illiquid, high-commission products. The driving force was brokers’ desire to get high commissions.”

If the brokerage was under capitalized then they can be sued for fraud and the principles are liable as the corporate veil has been pierced by the under capitalization.

As to the oral statements vs the written statements, I don't think a written statement precludes a fraud action b/c there was an oral statement as well. The two statements represent an "ambiguity" under the law and ambiguities are always held AGAINST the drafter of the written instrument, or contract, erog the brokerage is again liable.

SurfPup: The brokerage can be sued but may not get anywhere in court since a pledge to take disputes to arbitration was signed. In this case, the arbitration panel cited the precedent that if the fine print contradicts the statement of the broker, the fine print prevails. Of course, in any legal dispute, both sides cite precedents and it is up to the judge to decide which prevails. Best, Don Bauder

Thank you. From a lay persons' perspective it seems to me that in most cases the courts try to do the right thing. It's just in some cases it may be complicated to figure out what the right thing really is.

But this case seems pretty simple to me. Lie orally then tell the truth in writing - there's still a big lie in there.

ImJustABill: Of course, in this case we are talking about arbitrations, not courts. A judge in a courtroom has the appellate level and ultimately even higher courts looking over his or her shoulder. But arbitrators can twist the facts and interpretations and award the case to the brokerage house; the victim's only recourse is the courts, which are generally not sympathetic to appeals of arbitrations. Best, Don Bauder

Thank you. From a lay persons' perspective it seems to me that in most cases the courts try to do the right thing. It's just in some cases it may be complicated to figure out what the right thing really is.

Yes, it seems that way to the lay person, but the fact is judges are political appointees and the vast majority, like 80%+, are political operatives. That is how they get there and that is how they decide things. There is basically little accountability and the courts will 95% of the time or more side with the government or Big Business, government is basically a subsidiary of Big Business.

It is sad b/c the courts the the buffer and protection against an overbearing and over zealous government, and instead of protecting the victims, the poor or those that cannot fight for themselves they protect the perpetrators.

SP: It's like on Wall Street. The Securities and Exchange Commission was set up to protect the people from Wall Street. The agency evolved into an institution that protects Wall Street from the people. Best, Don Bauder

SurfPup: Unfortunately, I side with you on the question of how fair judges are, particularly in San Diego. Judges have personal biases and predilections, and favors to pay those who helped put them in office. We have seen some horrible examples of this bias in San Diego -- the John Moores cases, in particular, which exposed law enforcement as corrupt and judges as biased. Best, Don Bauder